The FHA announced important changes to the pricing of its mortgage insurance today. This change will help to shore up the long-term solvency of its mortgage insurance fund, improve affordability and sustainability for most borrowers, and price in a significant number of borrowers locked out of the market in recent years. It will also provide a strong signal, along with solid recent employment growth and lower mortgage rates, to first-time buyers who might be on the fence. Its not the silver bullet, but an important step toward normalization of the housing market.
Changes in Context
The President announced that the FHA will reduce its annual premium by 0.5%, or from 1.35% to 0.85% for a borrower using a 30-year fixed rate mortgage with a 3.5% downpayment. In historical context, that reduces the annual MI charge to its lowest level since since early October of 2010. The fee that FHA charges for its credit enhancement is a combination of an annual fee (MIP) which is paid monthly and an up-front charge (UFMIP) which can be paid as a lump some at closing or more often it is rolled into the balance and financed for the life of the loan. The total fee, estimated as an upfront price now stands at 6.0% , down from 8.5% prior to this change. The total fee is at its lowest level since 2011, but remains higher than other non-recessionary periods over the last 30 years.
Even with the rate reduction, the fee charged by the FHA for its mortgage insurance (6% of originated balance) more than covers the expected losses (5%), allowing excess fees to continue to build up the capital reserve to its required minimum of 2.0%. Furthermore, the added volume generated by the lower fees will help to ameliorate the income lost by reduced premiums. In short, by modestly reducing rates and expanding the pool of borrowers, the FHA is still on trajectory to meet its capital requirement over a modestly longer horizon, while reducing the amount that it charges borrowers beyond the cost of the program.
For a borrower with a $200,000 mortgage, this changes amount to a reduction in the monthly payment of $83, an improvement of 7.1%, or nearly $1,000 over the first year. By year five, this borrower has saved nearly $4,800, but over 30 years the borrower would save roughly $18,000. This later point is important as FHA still charges its annual MI fee for the life of the loan, a change instituted in 2011. Mortgage rates are expected to rise as much as two percentage points in the coming years, which will significantly reduce borrowers ability and incentive to refinance out of the FHA program as they have done in recent years. As a result, this change will have a larger impact for many homeowners over the life of their ownership.
The lower fees will also help to stymie the flow of lower-risk borrowers from the FHA to the conventional market. The FHA pools its expenses for low and higher risk borrowers, thus allowing it to provide lower average pricing than the private market would for moderate risk borrowers. To do so, the FHA must maintain some lower risk borrowers in its portfolio, vets its borrowers, and provides only vanilla products with no risky features. High pricing of its MI caused a flight of quality borrowers in 2013 and 2014 putting the FHA’s ability to fund middle class borrowers and its very mission in jeopardy.
Beyond stabilizing the shift between the conventional and FHA markets, the lower pricing will draw thousands of credit worthy borrowers back into the market. NAR Research estimates that the fee reduction will price in an additional 1.6 million to 2.1 million renters along with many trade-up buyers, resulting in 90,000 to 140,000 additional annual home purchases based on the standard affordability limits at the FHA and conventional market and dynamics in the housing finance market.
Implications for the MI Industry and the Housing Market
The reduction of rates at the FHA will make it tougher for the private mortgage insurers to compete for these homebuyers in the interim. As depicted below in yellow, the pricing advantage shifts from PMI to FHA for a significant portion of the credit box. Later this year, the FHFA is expected to announce new capital requirements for the PMI industry as well as a decision on the future of the GSE’s loan level pricing adjustments (LLPAs). Many have argued that the combined capital requirements of the PMIs and LLPAs provide too much capital protection, leading to inefficiency and high costs to consumers. If the FHFA follows the FHA in providing capital relief, pricing should shift back toward the PMI industry helping it to maintain its footing. This step is important as a healthy PMI industry, like a healthy FHA, is critical for a robust, safe, and liquid housing finance system over the long-term.
The FHA’s proposed changes to its pricing for 2015 are good for consumers and the economy. It puts money back into consumers’ pockets, improves affordability for many borrowers, and unlocks the opportunity to purchase a home for tens of thousands, while preserving the stability of the FHA’s fund and protecting tax payers. Sluggish income growth, low inventories and nagging tight credit remain headwinds for the market, but this shift is an important bell weather of returning health for the market.
 This is a conservative estimate with a multiple of 5. As rates rise and loan life extends due to reduced refinance incentives, the fees could generate higher revenues, further building reserves. Extension to a multiple of 6 would imply a total fee of 6.85%
With rising inventory and the strong price recovery since 2012, REALTORS® responding to the November 2014 REALTORS® Confidence Index Survey expected home prices to increase modestly in the next 12 months, with the median at about 3 percent: http://www.realtor.org/reports/realtors-confidence-index.
The map shows the median expected price change in the next 12 months by the state of REALTOR® respondents in the Sep – Nov 2014 surveys. States with the most upbeat price expectations (orange) include the District of Columbia and several states in the West and South regions. Michigan, Massachusetts, and Rhode Island also have strong price growth expectations. The states with the most upbeat price expectations have strong job growth and appear to be attractive to millennials and retiring baby boomers.
Median Expected Price Change of REALTORS® in Next 12 Months, By State
Based on Sep 2014-Nov 2014 RCI Surveys
 The median expected price change is the value such that 50 percent of respondents expect prices to change above this value and 50 percent of respondents expect prices to change below this value. A median expected price change is computed for each state based on the respondents for that state. The graph shows the range of these state median expected price change. To increase sample size, the data is averaged from the last three survey months.
 In generating the median price expectation at the state level, we use data for the last three surveys to have close to 30 observations. Small states such as AK,ND, SD, MT, VT, WY, WV, DE, and the D.C. may have less than 30 observations.
- Interest rates tend to be very low when there are problems and desperations in the economy. The economy in the meantime has moved into higher gear. GDP is expanding robustly and jobs are coming around nicely. But the overall interest rates continue to remain low. In fact, the mortgage rates have been declining in the past month. Whatever the puzzling reasons, the current low rates are good news for homebuyers.
- At the end of 2014, the average rate on a 30-year fixed rate mortgage was 3.87 percent. That is down from near 4.5 percent 12 months ago. Aside from the 18-month stretch in 2012 to mid-2013, there has never been a time since the Presidency of John F. Kennedy when the average mortgage rate fell below 4 percent.
- Consider, the 30-year rate was above 10 percent throughout 1980s. Because of the high prevailing mortgage rates during this era, adjustable rate mortgages steadily became more popular even though they carried the potential risk to upward adjustment. For those few homebuyers in today’s market who view 30-year rates as being high, the one-year ARM is at the lowest point in modern times: 2.40 percent rate at the end of December.
- A simple punching of the numbers into the mortgage calculators will show what happens to monthly payments at different interest rates. Since nearly all economists anticipate some rise in interest rates at some time this year, though, opinions differ on how much and how fast, it is worth reminding ourselves of the differences as shown in the table below on a $200,000 loan.
- Even if a person misses out on the very low interest rates and catches something higher, they should take comfort in that it is still a good deal from a historical perspective. NAR’s housing affordability calculates that to buy a typical home, a typical home buyer, with a typical income after a 20 percent down payment would be shelling out a reasonable amount on mortgage and not too much. Homebuyers can also take comfort in the fact that the monthly mortgage payment will be fixed and unchanging while in 30 years, if using recent history as a guide, food prices would have more than doubled, gasoline prices tripled, rent payments nearly tripled, medical service quintupled, and college tuition outrageous (rising eight-fold from current cost).
- NAR released a summary of existing home sales data showing that November’s existing home sales dipped from last month to the weakest sales pace in the last six months. November’s sales declined 6.1% from October but were slightly up, by 2.1% from a year ago in November 2013.
- The national median existing-home price for all housing types was $205,300 in November, up 5.0% percent from November 2013.
- Regionally, all four regions showed growth in prices, and the Midwest had the biggest gain of 7.0% from last year 2013. All regions showed a decrease in sales from last month, the Northeast and South were the only regions to have increases from a year ago.
- November’s inventory figures increased by 2.0% from a year ago and it will take 5.1 months to move the current level of inventory. It takes approximately 65 days for a home to go from listing to a contract in the current housing market, slower than last year at 56 days.
- Single family homes and condos both declined in sales from last month. Only single family homes had an increase from a year ago, while condo sales remained the same. Both single family homes and condos had an increase in price with single family homes up 5.6% and condos up 1.2 % from a year ago November 2013.
Confidence about the residential real estate sales outlook for the next six months broadly improved in November 2014 as reported in the latest REALTORS® Confidence Index Survey. An improving jobs market, the 30-year mortgage rate at approximately 4 percent, and higher inventories of available homes for sale may have accounted for the rebound in positive market expectations for sales of single family homes.
Expectations about the market for townhomes and condominiums also improved but were still somewhat weak (index below 50). REALTORS® continued to report about the difficulty of obtaining FHA financing for condominiums, typically the entry point for homeownership.
- The overall construction spending modestly edged down in the latest month due to a combination of government spending cuts and modestly less commercial real estate construction. The broad trend, nonetheless, is on the rise. That’s good news for workers in construction and for general contractors.
- Specifically, total dollar value of recently completed construction fell 0.3 percent in November from the month earlier. The construction of government-funded health care facilities, new schools, and power plants declined while the private sector construction of residential units increased. Commercial real estate construction was essentially unchanged.
- Despite the volatile monthly data, the trend is clearly on the upswing. From the cyclical low point of several years ago, the total construction dollar spending is up by roughly 20 percent. Construction of new hotels and lodging facilities are coming back strongly with a 100 percent jump from 2010. On the other end, the construction of buildings for religious worship has been on a long-term decline. (See graphs below).
- Because of more dollars on construction, the employment in this sector looks positive. Construction related jobs of specialty trade and general contractors took a big hit during the recession, falling from 5 million to 3.4 million. Now, the jobs are coming back with 3.8 million workers in this sector.
- Apartment vacancy rates are very low. In addition vacancy rates of office, retail, and warehouse buildings have been falling. It would appear therefore that more construction workers are needed. With oil prices low and oil drilling jobs to be cut soon, there could be more workers switching out of the oil industry and into construction in 2015. The financial inducement is there as well with construction workers’ earnings rising 2.7 percent in the most recent data, which is faster than the general wage growth of 2.1 percent.
- Looking at the data from NAR’s 2005-2014 Profile of Home Buyers and Sellers, first-time home buyers were more likely to live with parents, relatives or friends prior to purchasing a home than repeat buyers.
- For recent home buyers the percentage living with parents, relatives or friends prior to purchasing a home has remained consistent over the last 10 years, with an average of 11% of all buyers.
- The typical age of first-time homebuyers in 2014 was 31-years-old. First-time buyers made up a larger share of those who lived with relatives or friends prior to purchasing a home in comparison to repeat buyers who in 2014 were typically 53-years-old.
- Over the last decade an average of 19% of first-time buyers and 5% of repeat buyers lived with relatives or friends.
- The U.S. Census recently published an interactive infographic exploring how young adults, aged 18-34, have changed over the last 40 years.
- Over the last 13 years the percent of young adults living with a parent has increased from 23.2% to 30.3%.
- While the percentage of recent homebuyers who have previously lived at home has not increased to the same degree as the percentage of young adults living with a parent, the increase does show why the percentage of first-time buyers living with family or friends may not have decreased over recent years.
- For more information on this research, check out the 2014 Profile of Home Buyers and Sellers: http://www.realtor.org/reports/highlights-from-the-2014-profile-of-home-buyers-and-sellers and the U.S. Census Interactive Infographic: Young Adults Then and Now: http://www.census.gov/censusexplorer/censusexplorer-youngadults.html?sf6371858=1.
Many people make New Year’s Resolutions as the calendar flips from December 31st to January 1st. Often times, at the top of the list (along with trimming the waist line) is saving money and paying down debt. Many people do so with a goal in mind – a nice vacation, a new car, or even a new home. Maybe this year you are saving for your downpayment for a new home, or know someone who is.
The majority of home buyers use savings as a downpayment source—65 percent of all buyers (81 percent of first-time buyers, 57 percent of repeat buyers). Using savings as a downpayment source has increased in prominence over the last 14 years as buyers are relying less frequently on the proceeds from the sale of their primary residence.
Saving for a home can take time for home buyers. Among recent home buyers, 37 percent saved for six months or less, 15 percent saved for six to 12 months, and 10 percent saved for 12 to 18 months. Home buyers often make sacrifices on their path to homeownership. 72 percent cut spending on luxury or non-essential items, 56 percent cut spending on entertainment, and 45 percent cut spending on clothes.
There is a light at the end of the tunnel for those saving. Eighty-eight percent of recent home buyers financed their home purchase. The typical downpayment was 10 percent for all buyers, but six percent for first-time home buyers and 13 percent for repeat home buyers.
The payoff for home buyers is worth it. Seventy-nine percent of recent buyers believe their home is a good financial investment, and many believe it is a better financial investment then stocks. Aside from the financial investment, buyers were able to successfully complete their goal which was just to own a home of their own.
For more information on the 2014 Profile of Home Buyers and Sellers, visit: http://www.realtor.org/reports/highlights-from-the-2014-profile-of-home-buyers-and-sellers.
- Newly constructed homes are carrying a hefty premium over existing homes. The gap, which historically had been 15 to 20 percent, has in recent years widened to 30 to 40 percent. That suggests either existing home prices are much cheaper in relation to the newly built homes and/or that there is just not enough new homes being produced.
- In the most recent monthly data, in November, the median home price of a newly constructed home was $280,900 while the median price of an existing home was $206,200. This gap is 36 percent.
- Indeed, too few new homes are being constructed. Even though single-family housing starts are projected to have risen for the fourth time in the past five years, the level is essentially at a deep recession level. This year’s single-family housing starts look to hit 650,000. But the normal should be at least a million. Persistent underproduction of new homes is one key reason for pushing up prices. From 2004 to 2014, a typical newly constructed home price will have risen by 27 percent.
- Meanwhile, a typical existing home price has risen by 25 percent in the past three years. Even so, the decade growth in home price, due to the downward correction that occurred during the housing bust, is only 8 percent. Over the same decade, from 2004 to 2014, a typical apartment rent grew by 31 percent. In other words, home prices are not rising too fast or to a new bubble. Rather, the shortage of new construction is leading to the premium on the new homes to expand.
- If housing starts do not revive quickly and robustly then new home price premium could rise even further. NAR projects single-family housing starts to rise to 820,000 in 2015. That would be a nice growth and good news for homebuilders. Still it would be under the historical average.
Confidence about the residential real estate sales outlook for the next six months broadly improved in November 2014: REALTORS® Confidence Index Survey, http://www.realtor.org/reports/realtors-confidence-index. An improving jobs market, the 30-year mortgage rate at approximately 4 percent, and higher inventories of available homes for sale may have accounted for the rebound in positive market expectations for sales of single family homes.
Expectations about the market for townhomes and condominiums also improved but were still somewhat weak (index below 50). REALTORS® continued to report about the difficulty of obtaining FHA financing for condominiums, typically the entry point for homeownership.
REALTORS® reported that their confidence in local real estate market conditions in November 2014 was broadly steady compared to October, although slightly down from a year ago. The REALTOR® Confidence Index-Current Conditions for the current single family home outlook was near 50: (http://www.realtor.org/reports/realtors-confidence-index). In addition, REALTORS® were increasingly optimistic about the market outlook for the next six months. An improving jobs market, the decline in the 30-year mortgage rate to about 4 percent, and higher levels of available home inventory may have accounted for the uptick in market expectations.
First-time home buyers appeared to be slowly re-entering the market, with the share of first-time homebuyers at 31 percent, up from 28 percent a year ago. Investors and distressed sales continued to account for a smaller share of the market.
- Insurance claims by the jobless continue to decline, a sign of the continuing good health of the labor market. Claims for unemployment insurance filed in the week of December 13 totaled 298,000, a decrease of 6,000 from the previous week. This puts the 4-week moving average to 298,750, which is below the 300,000 benchmark that signals a healthy economy. A healthy job market is important to keep the housing market recovery going.
- The latest data at the state level is of the week ending December 6. The largest decreases were in Nebraska (-429), Vermont (-353), Arkansas (-216), Kentucky (-134), and North Dakota (-13).The largest increases in initial claims for the week ending December 6 were in Pennsylvania (+12,302), Texas (+9,107), Georgia (+8,214), California (+6,051), and New York (+5,972). States reported increases/decreases in a variety of sectors that included manufacturing, construction, and services.
- In a related report, the Federal Operations Market Committee which sets monetary policy decided yesterday to keep steady the federal funds rate which underpins the movement of mortgage rates. Interest rates have fallen sharply, with the conventional 30-year mortgage rate averaging 3.8 percent for the week ending Dec 18. There is less pressure for inflation to increase given the steep drop in oil prices.
- Given the favorable economic environment of low interest rates and solid job growth (240,000 jobs created per month in 2014), NAR forecasts 4.9 million of existing home sales in 2014, increasing to 5.2 million in 2015.
Buyer and seller use of a real estate agent in the process of buying or selling a home remains at a historical high. On the buying side, 88 percent of buyers purchased a home while using a real estate agent or broker—up from 69 percent in 2001. On the selling side, 88 percent of sellers used an agent in their selling process—up from 77 percent in 1991.
The housing market can be difficult to navigate for home buyers who have not been in the market for several years, but can be especially difficult for first-time home buyers who have never purchased a home. Not surprisingly, the number one benefit that buyers had from using a real estate agent during the home purchase process was helping them to understand the process. Buyers and sellers both place a high importance on choosing an agent who is honest and has integrity. They want someone who has a good reputation, knows the purchase process, and knows the neighborhood.
Personal referrals drive the real estate business and are the leading way both buyers and sellers find their real estate agent to work with. Fifty-two percent of buyers and 60 percent of sellers used an agent that was referred to them or they had worked with before. Seventy percent of sellers and 67 percent of buyers only interviewed one agent before finding the agent to work with. More than half of buyers reached out to a potential agent via phone, and most only needed to call once before the real estate agent returned the call and the professional relationship started.
For agents out there, the take away is: continue building your knowledge of the purchase process and becoming your neighborhood specialist, but also work to build trust with your current clients—they will send future clients your way. And if someone calls you to begin the search process, call them back—you are likely their only contact.
For more information on this research, check out the 2014 Profile of Home Buyers and Sellers: http://www.realtor.org/reports/highlights-from-the-2014-profile-of-home-buyers-and-sellers
- It has become easier to breathe with consumer prices falling by the most amounts in six years. Lower gasoline prices are everywhere. But wait, renters are getting squeezed hard with fast rising rents.
- Specifically, the overall Consumer Price Index (CPI) fell 0.3 percent in November from the month prior. This largest monthly decline in a long time has pushed down the annual inflation rate to only 1.3 percent. With the Cost-of-Living-Adjustment on government issued checks, like social payments, set to rise by 1.7 percent in 2015, some people will experience a modestly improved living standard.
- Apartment rents increased at the highest pace since November 2008, rising 3.5 percent from one year before. Homeowner equivalency rents – a hypothetical figure of what the homeowners would pay in rent if they were renting out their home – increased by 2.7 percent.
- Very good that the overall CPI is decelerating. Not only is it good for consumers, but it also implies that the Federal Reserve can be patient and delay raising interest rates. The Fed considers the ideal inflation rate to be at or near 2 percent. Given low inflation, the Fed can keep its short-term fed funds rate at zero at least through the spring of next year.
- Gasoline prices as everyone knows have been tumbling. A typical American family spends $3,000 a year at the pump. It will be $2,000 if gasoline prices stay at this level, a cool $1000 savings. The cause is an oil production boom in North Dakota. This one small U.S. state looks to flip at least one bad acting oil-dependent country – Russia, Venezuela, or Iran.
- With low gasoline prices, there could be record driving miles over this holiday break, including possibly extending vacations to go to new places. Be aware, however, of more domestic arguments. Possibilities of more new activities mean more decisions need to be made. Not all will agree with that decision. That is why there are more domestic arguments during vacations than on normal days where fewer decisions are made.
- New home construction activity declined slightly in the latest month. However, the overall annual figure is likely to show an 8 percent gain for 2014.
- Specifically, housing starts fell 1.6 percent in November from the prior month. Though a decline in housing starts has been above 1 million annualized production rate for the 3rd consecutive month, something that has not happened since 2008.
- The gains in housing starts in recent years have been predominantly on the apartment side. The multi-family housing starts have returned to their historical normal. Homebuilders are responding to increased occupancy rates and rising rents.
- The construction of new single-family homes, however, continues to languish. That is a bit of a puzzle since the builders are having an easy time selling newly constructed homes, with an average of only 3 months to move a property after a completion.
- Rising construction costs, shortage of construction workers, and the difficulty of obtaining construction loans from local banks have been the key reasons as to why homebuilders have been unable to quickly build.
- Overall, the homebuilding activity is too low in relation to job creations and population growth. Do not be shocked if there is shortage of inventory when spring home buying season returns. As a result home prices may rise too fast. Only a sharp ramp-up in new supply from new home construction will keep the lid on home prices. If housing starts can reach 1.25 million in 2015 then home prices will rise by 3 to 5 percent. If not, then much faster home price appreciation should be expected.
- Meanwhile, homebuilders’ assessment of market conditions has been surging and is at a historically high level. But that sentiment appears to be a self-deception as it does not match up with reality. Is this a case of too much idle time on their hands leading to unrealistic wild thoughts, like a lovesick teenager? Or could it be that many homebuilders have gone under during the downturn and the only ones providing the assessment are the big builders with Wall Street money now facing less competition? Something indeed to smile about.
- Factory production in America grew solidly in the past month. This implies that the U.S. economy is brushing aside the weakening European economy and is in no danger of a recession. Job gains will continue. Commercial REALTORS® specializing in industrial spaces will likely experience increased business opportunity.
- Specifically, industrial production in November was 5.2 percent higher from one year ago. That is the best gain since January 2011.
- The construction industry has been one of the lagging sectors in the current economic cycle. Therefore, there has been lower production for construction supplies, like cranes. Meanwhile, the manufacturing sector is reviving very nicely.
- Because of rising industrial production, the capacity utilization rate finally rose above 80 percent for the first time since early 2008. High utilization will require constructing new factories. Commercial real estate practitioners involved in factory site locations need to keep their eyes sharp.
- It is very good news that U.S. companies are producing more. However, it will still be the case that many developing countries will take up a larger share of global manufacturing in the future, particularly related to unskilled repetitive factory assembly work. With wages rising in China, new factory centers could arise in Vietnam, the Philippines, and Mexico. Americans working in menial repetitive tasks that do not require much education will therefore face low-wage competition from these countries. However, Americans in the knowledge-based work like software development, medical instruments, and professional business service will experience rising global demand for their services and will experience higher salaries over time. Income inequality in America will therefore likely become even more unequal in the future between those with and without an education.
- Retail sales are strengthening, likely helped by lower gasoline prices. This implies continued economic expansion and job creations. Commercial REALTORS® should anticipate increased leasing activity and higher retail rents next year.
- Specifically, sales at retail and restaurants rose by 5.1 percent in November, its best showing in over a year. The boost is coming as spending at gasoline stations fell for the 6th straight month. As such, falling oil prices are a net positive for the U.S. economy as it helps consumers spend money in other sectors.
- Retail sales that are generally tied to the housing sector are climbing as well. Spending at furniture and home furnishing shops increased by 2 percent while spending on building materials and garden equipment rose by 8 percent. They are likely to improve further because home sales have become positive on a year-over-year basis in recent months after a brief slump in the earlier part of the year.
- Real estate investors of retail shops have been doing well. Rents are rising and property prices have been zooming. The total investor returns, according NACREIF, provided 7 percent gain in the past year on top of double-digit gains in recent prior years. The average national retail vacancy rate is likely to dip to 9.6 percent next year from 9.8 percent this year. Retail rents are projected to rise by 2.5 percent.
- Warning: if interest rates rise too fast next year then the cap rates (rent income-to-price ratio) will also have to rise. That could mean property price declines in the retail sector unless rents pick up even faster.
- People associate retail sales with buying clothes. City people buy more of them than country folks since more eyeballs will get a glimpse of it. That says we buy clothes not for ourselves but for others. Looking sharp in the city at times appears strange. One famous European painting of “Betrothal” is not of a shotgun marriage but of the fashion of the time of having the right “pregnant look.” Future generations will be laughing at our current fashion.
Back in the 3rd quarter of 2005, the national median home price peaked at $227,633. Nine years later, the national median was $216,367 in the 3rd quarter of 2014, a decline of 4.9%. While the national median sale price remains below the boom-period peak, a majority of local markets have outpaced the national average over this period.
As depicted above, markets in North Dakota, largely due to a boom in oil production surged with the median price in Bismarck up 87.2% over this period. Markets in Texas have done well and six registered in the top 10. Metro areas in the Midwest, the Mid South, and the Northwest gained over this period. In total, 87 of the metro areas tracked saw an increase of the median home price in the nine years since the national market peak.
At the other end of the spectrum were markets concentrated in the boom and bust states like Southern California, Arizona, Nevada, and Florida. Markets in New England have sputtered in their recovery, partially due to the judicial process for handing foreclosures used in these states. The clearing process for foreclosures takes longer and the overhang of distressed properties weighs on the median price, though it may not be representative of submarkets in these areas.
Curious how your market has performed? To find out more about your market or others, see the Local Market Reports for the 3rd quarter.
Mortgage rates eased in the second half of 2014 based on unrest in Eastern Europe and fear of an economic slowdown in Europe. This decline in rates has helped to improve affordability, but rates are expected to rise over the next 12 to 16 months. As rates rise, local income growth will become more important. For more information on local conditions, see NAR’s 3rd quarter Local Market Reports.
Home prices, mortgage rates, and mortgage insurance can all affect affordability. But income growth is also a critical driver of affordability. Mortgage rates eased over the last three decades, ameliorating sluggish income growth over the most recent decade, but that is likely to change over the coming decade putting additional emphasis on the need for solid income growth.
Nationally, the median nominal per capita income grew 1.9% from 2012 to 2013 and at an annualized rate of 1.8% from 2005 to 2013. The average nominal per capita income growth from 2012 to 2013 of the 169 metro areas tracked by NAR Research was 1.1%. Over the longer horizon, the average was 2.7%.
However, real income growth was relatively weak over this period. Inflation, as measured by the personal consumption expenditures (PCE) series, was 1.9% over this period, suggesting that real income growth, nominal income growth adjusted for inflation, did not maintain pace with inflation over this time period. In fact, real per capita income growth fell 0.4% from 2005 to 2013. Adjusting the nominal per capita income growth of the MSAs tracked by the 2.2%  national correction, 126 of these metro areas experienced positive real per capita income growth over this period. The average real per capita income growth was 0.5%, higher than the national average. As depicted above, the strongest annualized real per capita income growth was grouped in North Dakota, Texas, and parts of the Northeast. Bismarck and Fargo were first and third in terms of median income growth, but New Orleans which rebounded from the post-Katrina devastation over this period, was second. Texas and New York each had five markets in the top twenty.
Stagnant real income growth could become an issue. As depicted above, forecasting out the debt-service ratio (annual PITI/annual household income) under a stylized scenario where mortgage rates rise from 4.0% in 2014 to 6.0% by 2018 with different income growth paths depicts the impact on affordability and access to credit. As rates rise without adequate income growth, debt service ratios will rise and in a worst case scenario above even FHA eligibility levels.
Home buyers tend to have higher incomes than non-buyers and borrowers may currently under report their incomes when qualifying, both of which could ameliorate the impact. However, Analysis by Federal Reserve Economists suggests that a 2% increase in mortgage rates would result in a 5% to 7% decline in home purchases, or 250,000 to 350,000 fewer home purchases. Furthermore, these figures do not account for mortgage insurance and loan level pricing adjustments (LLPAs) that are currently impacting affordability. This stylized analysis emphasizes the importance of income growth but it should be noted that proper pricing of mortgage insurance and reasonable capital relief could play a role in boosting affordability as mortgage rates rise.
A restoration of traditional, sound underwriting will allow in many borrowers who may not have had access to lower rates in recent years.
Curious about housing and economic conditions in your area? See the 3rd quarter Local Market Reports for more information on conditions in your areas.
 Per capita adjusted for inflation (CPI-U-RS)
 2.2% was the national adjustment for median family, household and per capita income. A local adjustment would be ideal, but is not available.
Metro areas with a lower cost of living and sunnier weather are poised to see an increased number of Baby Boomers moving in and buying a home as some delay retirement and remain participants on the labor market.
NAR analyzed current population trends, housing affordability, cost of living, housing inventory and job market conditions in the 100 largest metropolitan statistical areas across the U.S. (hyperlink to list of 100) to determine housing markets most likely to see a boost in sales from Baby Boomers. State taxes and the share of expenditures for Public Welfare, Hospitals, Health, Police Protection, Parks and Recreation at the state level for those areas were also considered (tax expenditures hyperlink).
The top markets positioned to see an influx of baby boomer homebuyers are (hyperlink for list of 10):
- Albuquerque, New Mexico
- Boise, Idaho
- Fort Myers, Florida
- Greenville, South Carolina
- Orlando, Florida
- Raleigh, North Carolina
- Sarasota, Florida
- Tucson, Arizona
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Click on the tabs to follow the story below. Hover over the map for a snapshot of each metro area’s share. The following charts show the housing and job market conditions for the 10 most attractive metro areas for Baby Boomers compared to the average for the 100 largest metro areas.